The concept of indirect polluter and jurisdictional choices in environmental liability cases

Carlos Portugal Gouvêa
PG Law, São Paulo

Caio Yoshikawa
PG Law, São Paulo

Concerns with climate change have transformed environmental litigation, creating a new trend of lawsuits related to massive disasters. Now cases are brought simultaneously in several jurisdictions with regards not only to companies directly related to the events, but also service providers, creditors, suppliers and others. 

Not only can these cases be filed against many different actors related to the disaster, but they can be presented in several jurisdictions at once, based on the international expansion of class action systems that accept various degrees of extraterritoriality. Another ingredient to this process and the focus of this article is the result of developments in Brazilian law, namely the concept of the 'indirect polluter'. 

Brazil, a country with one of the world’s highest biodiversity, has experienced some of the world’s largest environmental disasters in the last decade, such as the catastrophic failures of the mining dams of Brumadinho and Mariana, in the state of Minas Gerais, which led to massive litigation both before Brazilian and international courts, for example, the courts of England and Wales. In this regard, the concept of 'indirect polluter' played a pivotal role in assigning responsibility beyond the immediate perpetrators of the environmental damage and as a result, may have consequences for transnational litigation if adopted by courts in other jurisdictions.

The indirect polluter: extending environmental liability

Brazilian environmental law recognises that responsibility for ecological harm extends beyond the direct polluter –the entity physically causing environmental damage – to those who contribute to or benefit from environmentally hazardous activities. Article 3, IV of the National Environmental Policy Law (Law No. 6,938/1981) establishes that legal persons, whether public or private, may be held liable even if they do not directly cause environmental damage.

This principle is crucial in cases involving large corporate structures, where decision-making, financial gains, and risk distribution transcend a single legal entity, including more complex types of corporate business combinations such as joint ventures.  In these cases, litigation must decide not just whether the direct polluter bore responsibility, but whether the shareholder or the co-controlling shareholder, or even relevant creditors or service providers, also known as indirect polluter.

In the case of shareholders, it means that investors with extensive control mechanisms and decision-making authority over direct polluters are subject to tests to ascertain whether the role played by them in the environmental disaster, extended beyond mere investment. The following factors must be taken into account: 

•    The connection between the operations of the shareholder and the company, such as agreements for use of facilities related to environmental damage.
•    Participation by shareholders (or their representatives) in operational committees of the direct polluter.
•    Corporate documents which demonstrate the shareholders influence over the direct polluter company’s policies, including those related to environmental risk management. Such documents should include by-laws, minutes of shareholders’ meetings and shareholders’ agreements.

All these factors may reveal if, under Brazilian environmental law, the shareholder was not merely an investor, but an actor whose control and benefit from the direct polluter company’s operations positioned them as an indirect polluter Should the  shareholder meet a certain threshold, it could be held liable for the environmental damage, even if it did not directly oversee the day-to-day operations of the direct polluter company. Shareholders are the most characteristic potential indirect polluters, but Brazilian case law has already made it clear that this concept could be extended to other stakeholders, such as creditors and service providers, which may be subject to similar tests.

Holding indirect polluters accountable through transnational litigation

Both environmental harm and investment are phenomena that know no borders. Their impact across multiple jurisdictions have raised questions regarding which jurisdictions would have legal authority over related claims. In the case of the Brumadinho and Mariana dam failures, the direct damage may have affected only the population living nearby. However, the case gained international recognition because of the high profile of the companies involved, and several international investors, customers, creditors and suppliers.  The consequence for such stakeholders is the possibility of facing lawsuits in multiple jurisdictions. Because such disasters happened in Brazil, Brazilian law may apply in these other jurisdictions. If that is the case, the usual defenses would be those in which it said a party cannot pierce the corporate veil. However, if Brazilian law applies, the concept of indirect polluter will also be applicable and then the criterion will be how much control the stakeholder had with regards to the causes that led to the disaster. This concept of indirect polluter prevents the use of legal entities as a shield in a litigation, and looks to the actual involvement of those stakeholders and their role in the events that led to the disaster.

It has been recognised for some time that creating complex corporate structures to avoid legal liability,  may not be economically efficient, since it could create incentives for bad corporate behavior, cause damage to customers and communities all over the world. As a result, many of the phenomena that we described above in this rise of climate litigation were focused on pursuing parent companies and/or shareholders, to find ways of sidestepping the corporate shield, , through class actions and extraterritorial claims. But those mechanisms only overcome two problems of corporate shielding: lack of coordination of the victims and offshoring corporate control through a network of subsidiaries. What we argue here is that the concept of indirect polluter provides a criterion that should be adopted by other courts in identifying stakeholders that actually had the knowledge and control to prevent a disaster and did not act upon it.

Of course, those concepts complete each other. Extraterritoriality allows for the involvement of courts with greater expertise and experience (having worked on similar cases) to hear the dispute. In England, in the landmark case of Vedanta Resources Plc & another v Lungowe & others [2019] UKSC 20, the Supreme Court found that a parent company domiciled in England could be held liable for the environmental damages resulting from the actions of its subsidiary in Zambia based on the duty of care of the shareholder. England has a reputation in the international legal community for the quality and impartiality of its judges, fairness, perceived efficiency and most importantly predictability when resolving disputes. The certainty of the English common law, which has developed over centuries means that international parties will come to London to resolve their disputes. Parties to such proceedings tend to accept the decisions of the English courts (following their rights to appeal) because of these factors, knowing that they have obtained ‘fair justice’ (or as good as it can be). This means that England can and does accommodate cases (provided there is a sufficient jurisdictional nexus) relating to economic disasters.

Conclusion

The interaction between the Brazilian environmental law concept of indirect polluter liability and the possible choice of litigation in multiple jurisdictions has several implications.  The first is the expansion of corporate liability and social and environmental responsibility especially among transnational groups, since parent companies and shareholders are no longer protected by legal structures that separate operational subsidiaries from decision-making shareholders. This reduces the costs of corporate shielding, but it also requires independent and effective court systems.

This leads us to the second implication, which is a result of combining the concept of indirect polluter with extraterritoriality. Jurisdictional flexibility allows victims to pursue claims in courts where the controlling shareholders of companies, relevant creditors or service providers are located, improving their access to justice. National (domestic) courts may have limitations with regards to the remedies to be applied when most of the assets of the companies involved in the disasters are located abroad. The combination of the concept of indirect polluter and extraterritoriality prevents the undesirable situation in which the victims win an award but will not be able to recover any monies because the local company is an empty shell or is undergoing a reorganization or bankruptcy process.

Finally, the use of national law concepts such as the 'indirect polluter liability' by other courts using extraterritoriality may also lead to a greater adoption of the concept by other courts when applying their own local law, compelling companies to adopt more stringent risk management and sustainability practices to avoid legal repercussions in several jurisdictions at once. In such systems, the negative effects of corporate shielding may finally be overcome.